A look at the economics of breeding, selling and racing thoroughbreds, and at the various players in the racing game, from race track operators to state governments to those of us who are crazy enough to own and/or place a bet on these gorgeous, courageous equine athletes.

Tuesday, December 27, 2011

Hong Kong 1. Where Even the Owners Make Money

Through a combination of fortuitous circumstances, my wife and I are lucky enough to be spending a month in Hong Kong, visiting our daughter, who works here, grading our law school exams far from the pleas of worried students, and, not so incidentally, checking out the Hong Kong racing scene.

Thanks to the kindness of Hong Kong Jockey Club Executive Director of Racing Bill Nader, formerly chief operating officer of NYRA, and Bill's assistant, Anny Kwan, we've enjoyed the best accommodations that Sha Tin and Happy Valley race courses have to offer, and we've also just wandered around in the grandstand at each track, absorbing the ambiance of being a regular racing fan.

So, for those who haven't had the chance to see Hong Kong racing in person, here are three blog postings on our experience, and how the Hong Kong scene compares with American racing. Today's post covers the economics of racing in Hong Kong; subsequent posts will deal with the experience of racegoing at the Sha Tin and Happy Valley tracks and with the medication and related issues.

First, the money.

Hong Kong has 83 racing days a season, typically a weekend day at the sprawling Sha Tin track in the New Territories north of Hong Kong proper, and a Wednesday night meet at close-in Happy Valley on Hong Kong island. For those 83 days, total handle is roughly HK$1 billion (US$128 million)per racecard; HK$81.9 billion for the most recent fiscal year. Counting betting on soccer and the lottery, both of which also flow through the HKJC coffers, total annual handle for the HKJC is upwards of HK$130 billion (US$ 17 billion).

Yesterday's 10-race card at Sha Tin -- a typical race day with mostly what would be mid-level claiming and allowances races in the US and a couple of high-level allowance/small stakes as the features (albeit with a purse of US$175,000 on the "small" stakes) -- drew 26,580 to the track, which felt comfortably busy, but by no means crowded, and attracted total handle of HK$ 1,113,121,195 (US$142 million). Of that, roughly 10% is typically bet on-track, with the rest on the HKJC's phone and computer networks and in the 100-plus OTB storefronts. No matter; all the takeout from each wagering platform flows through to the HKJC.

Takeout averages 18.5%, marginally less than the US average, but in the same general range as most US tracks. That produces net revenue of nearly HK$24 billion, of which nearly two-thirds goes to the Hong Kong government in the form of taxes. The remaining one-third is split roughly equally between money for operations and purses on the one hand and charitable contributions on the other, making the Jockey Club by far the most important philanthropist in Hong Kong. Some idea of the scope of HKJC's charitable efforts can be seen here. And the most recent annual report of the HKJC is available here.

Unlike US horse racing, the HKJC has an effective monopoly on legal gambling in its jurisdiction. The nearest casinos are in Macao, an hour away by high-speed ferry. And those casinos, while glitzy, are no match for the better gambling palaces in Las Vegas, Atlantic City, or even for establishments like Foxwood's in Connecticut, all of which siphon off money from US tracks. The HKJC also runs Hong Kong's lottery, although total lottery handle is less than a quarter of what's bet on the ponies. And the HKJC has, since 2003, enjoyed a monopoly on sports betting -- principally on overseas soccer -- that previously flowed to illegal bookmakers. Moreover, there are few organized sporting event in Hong Kong to divert attention away from the races; no pro football or basketball, no college sports with crazed alums tailgating before the big game, etc. Not even any standardbreds pulling silly little carts (aka harness racing). The thoroughbreds are just about the only game in town.

Like Keeneland, NYRA and the Oak Tree Racing Association, the Hong Kong Jockey Club is effectively a self-perpetuating not-for-profit corporation. It has no shareholders, and is governed by a self-selected leadership, presumably with the tacit approval of the government. Unlike Keeneland, NYRA and Oak Tree, however, the HKJC is the entire show as regards racing. It puts on the races, owns the facilities, employs just about everyone in the business except for horse owners and trainers (even the grooms and hotwalkers are HKJC employees), runs the vast network of OTBs and phone and online wagering, and, perhaps most important of all, is its own regulator, setting the rules, running the testing laboratory and meting out punishments. A bit lacking in checks and balances and in due process, at least to American eyes? Perhaps, but it works.

Total purses in the 2010-11 racing season were HK$785 million; just about US$100 million. The total number of starters for the 83 racing days was 9,502, and the average horse based in Hong Kong made 7.4 starts during the year -- also comparable with the US -- so earnings per start, a key measure of owners' financial health, was HK$82,600, or roughly US$10,500, and the average earnings per horse were HK$611,000, or US$ 78,300.

According to Bill Nader -- I wasn't able to verify these numbers independently, but I have no reason to doubt them -- the all-in cost of keeping a horse in training in Hong Kong is about US$45,000. Once again, that's comparable to training and vet costs at New York race tracks. Factoring in the jockeys' and trainers' commissions on purse money, that means that a horse based in Hong Kong probably needs to earn US$60,000 or so to break even. So, with actual purse money per horse averaging more than that, it appears that a majority of Hong Kong-based horses actually pay for themselves.

If only that were true in the US. According to the US Jockey Club's statistics, purse money for American horses comes to roughly 50% of the cost of maintaining our race horses in training, not counting the initial cost of breeding or purchasing the horses.

And owners aren't the only ones in the game who do well. For example, grooms, who are employed directly by the HKJC and assigned to trainers (no worries about the trainer missing a payroll or failing to pay his workers comp. premium) earn on the order of US$5,000 a month, plus a share of their horses' winnings, for caring for a maximum of three horses each. I know a fair number of US trainers who'd be happy with monthly earnings of that much, and few grooms in the US earn more than half that amount, usually for taking care of at least four horses. Not all grooms in Hong Kong may be driving Mercedes, but at least a few are.

And the Hong Kong government does very well from racing. Hong Kong is generally a low-tax jurisdiction; my daughter, who was paying something like 35% of her income in income and FICA taxes when she worked at CNN in Atlanta, now pays only 15%, the maximum personal tax rate in Hong Kong. But racing is the government's cash cow. Over 7% of total government revenue traces back to the HKJC, mostly in the form of very high taxes on betting handle; in addition, the HKJC pays a small tax in lieu of income tax on its annual surplus. The wagering taxes are so high, in fact, that the HKJC's annual report rails against the danger that the current rate of taxation might someday make Hong Kong gambling uncompetitive, compared to Macao and to unregulated internet gaming options.

In the long run, the demands of government may impinge on the financial success of Hong Kong racing. But that's true in the US as well, as financially strapped state governments look covetously at the slot-machine revenues that have been keeping so many race tracks afloat. In the short run, the Hong Kong Jockey Club's monopoly on legal gambling, combined with a public extremely fond of wagering -- according to Nader, 80% of adults in Hong Kong are HKJC customers, and roughly 20% are regulars -- presage a continuation of a racing business in which almost everyone, except, of course, the poor bettor, wins. So far this year, business at the track is up about 10% over last year, so the sun isn't showing any sign of setting soon.

2 comments:

Great post, and I'm looking forward to the next ones. I have an enormous respect for Hong Kong racing, which is the most lucrative and cleanest operation in the world. Only thing is, it's impossible to be an owner there without good connections or a several year wait. The market is very closed, both to horses AND owners, which is its only fault - but also its greatest strength, because that closed market allows it to be run so strictly.

The other reason horses make money is that the Hong Kong Jockey Club must approve all horses imported, and they make sure they have a very homogeneous bunch. Pretty much everything on the ground there stands a good chance of winning a race sooner or later, because the competition is so well-matched because of the import rules.

About Me

Steve has managed Castle Village Farm's racing partnerships since 1999, and has been going to the races since the 1950s. He;s active in horsemen;s and backstretch welfare organizations and, when he's not at the track, moonlights as a tax and trusts and estates lawyer and a law professor.